Consultation to expand the scope of short position reporting and on the corresponding amendments to the Securities and Futures (Short Position

Consultation to expand the scope of short position reporting and on the corresponding amendments to the Securities and Futures (Short Position Reporting) Rules November 2015

Table of Contents Foreword 1 Personal Information Collection Statement 2 Executive Summary 4 Section A - Introduction 4 Section B - Proposed Changes to the Existing Short Position Reporting Regime 6 (I) Expanding the scope of reporting 6 (II) (III) Reporting threshold trigger for short positions in relation to collective investment schemes (CISs) 8 Designated Securities that are traded in foreign currency 9 (IV) Reporting in contingency situations 9 (V) Reporting through SFC designated electronic system 10 Section C - Proposed amendments to the Securities and Futures (Short Position Reporting) Rules (Cap 571AJ) 11 Concluding Remarks 12 Appendix A - Securities and Futures (Short Position Reporting) Rules 13

Foreword On 18 June 2012, the Securities and Futures (Short Position Reporting) Rules (Cap 571AJ) (SPR Rules) to introduce the short position reporting requirement for the constituent stocks of the Hang Seng Index (HSI), the Hang Seng China Enterprises Index (HSCEI) and other financial stocks specified by the Securities and Futures Commission (SFC) came into effect. In keeping with the development of short selling activities in the Hong Kong market and to further improve the transparency and monitoring of short selling activities, the SFC is proposing to expand the scope of the short position reporting regime to cover other securities and make a few other enhancements. The SFC is seeking comments on these policy proposals and modifications to the SPR Rules to reflect the proposed enhancements. To submit comments Interested parties are invited to submit written comments by any one of the following means on or before 31 December 2015: On-line submission: Email: Post : http://www.sfc.hk/edistributionweb/gateway/en/consultation/ SPR-consult@sfc.hk Supervision of Markets Securities and Futures Commission 35/F, Cheung Kong Center, 2 Queen s Road Central Hong Kong Fax: (852) 2521 7917 Any person commenting on the consultation paper on behalf of an organisation should provide details of the organisation whose views he represents. Please note that the names of the commentators and the contents of their submissions may be published on the SFC s website and in other documents to be published by the SFC. In this regard, please read the Personal Information Collection Statement attached to this consultation paper. If you do not want your personal information, affiliation and/or comments to be disclosed to the public, please state this clearly when making your submission. In this connection, the SFC will not regard a standard confidentiality statement in an email message as a request not to publish name and/or comments. 1

Personal Information Collection Statement 1. This Personal Information Collection Statement (PICS) is made in accordance with the guidelines issued by the Privacy Commissioner for Personal Data. The PICS sets out the purposes for which your Personal Data 1 will be used following collection, what you are agreeing to with respect to the SFC s use of your Personal Data and your rights under the Personal Data (Privacy) Ordinance, Cap. 486 (PDPO). Purpose of collection 2. The Personal Data provided in your submission to the SFC in response to this consultation paper may be used by the SFC for one or more of the following purposes: (c) (d) To administer the relevant provisions 2 and codes and guidelines published pursuant to the powers vested in the SFC; In performing the SFC s statutory functions under the relevant provisions; For research and statistical purposes; For other purposes permitted by law. Transfer of personal data 3. Personal Data may be disclosed by the SFC to members of the public in Hong Kong and elsewhere, as part of the public consultation on this consultation paper. The names of persons who submit comments on this consultation paper together with the whole or part of their submission may be disclosed to members of the public. This will be done by publishing this information on the SFC website and in documents to be published by the SFC during the consultation period or at its conclusion. Access to data 4. You have the right to request access to and correction of your Personal Data in accordance with the provisions of the PDPO. Your right of access includes the right to obtain a copy of your Personal Data provided in your submission on this consultation paper. The SFC has the right to charge a reasonable fee for processing any data access request. Retention 5. Personal Data provided to the SFC in response to this consultation paper will be retained for such period as may be necessary for the proper discharge of the SFC s functions. 1 Personal Data means personal data as defined in the Personal Data (Privacy) Ordinance. 2 Defined in Schedule 1 of the SFO to mean provisions of the SFO and subsidiary legislation made under it; and provisions of Parts II and XII of the Companies Ordinance (Cap. 32), so far as those Parts relate, directly or indirectly, to the performance of functions relating to: prospectuses; the purchase by a corporation of its own shares; a corporation giving financial assistance for the acquisition of its own shares etc. 2

Enquiries 6. Any inquiries regarding the Personal Data provided in your submission on this consultation paper, or requests for access to Personal Data or correction of Personal Data, should be addressed in writing to: The Data Privacy Officer Securities and Futures Commission 35/F Cheung Kong Center 2 Queen s Road Central Hong Kong A copy of the Privacy Policy Statement adopted by the SFC is available upon request. 3

Executive Summary 1. The SFC is proposing to expand the scope of the short position reporting regime and also to make a few other enhancements to the SPR Rules. This consultation paper invites the public to comment on the policy proposals and the corresponding amendments to the SPR Rules. 2. There are three sections to this paper. Section A recapitulates some background information to explain the context in which short position reporting was introduced. We also share some key observations regarding short selling activities in Hong Kong based on the information gathered from short position reports. 3. Section B is the consultation section that lays out the proposed policy changes to the existing short position reporting regime which are as follows: I. The SFC is proposing to extend short position reporting to all securities that are determined by The Stock Exchange of Hong Kong Limited (SEHK) to be Designated Securities ; II. III. IV. The reporting threshold trigger for Designated Securities that are stocks remains unchanged, but for those that are collective investment schemes (CISs), the reporting threshold trigger will be set only at the $30 million threshold; For the purposes of determining the value of a net short position and where applicable under the SPR Rules, if the closing price of a Designated Security is in a foreign currency, it must be converted into Hong Kong dollars (HKD) at a specified rate of exchange for that foreign currency; In a contingency situation, daily reporting will apply to those Designated Securities determined by the SFC which the SFC will list out on a public notice; and V. The SFC may designate more than one electronic system for short position reporting. 4. Section C identifies the relevant changes which will be made to the SPR Rules to reflect the proposed policy changes and seeks comments from the public. Section A Introduction Context against which the existing short position reporting was introduced 5. Following the collapse of Lehman Brothers in September 2008, regulators in a number of major overseas markets introduced emergency measures to restrict short selling activities. In the midst of the extreme market conditions, the measures were intended to address concerns that short selling could further exacerbate the downward spiral of stock prices, thereby eroding market confidence which was already very fragile. 4

6. In response to the crisis, the International Organization of Securities Commissions (IOSCO) published in June 2009 the final report on Regulation of Short Selling 3 which sets out four high-level principles for effective regulation of short selling. One of the four principles relates to the merits of enhancing transparency on short selling. IOSCO recommended short selling should be subject to a reporting regime that provides timely information to the market or to market authorities. 7. Consequently, as part of the global regulatory reforms to restore investor confidence and to reduce systemic risk, a number of overseas markets including Australia and the European Union (EU) introduced short position reporting or short position disclosure requirement. Given the global regulatory developments, the SFC introduced the SPR Rules to implement the short position reporting regime in June 2012. 8. When the SFC introduced short position reporting in 2012, the initial focus (as explained in past consultation papers and consultation conclusions papers 4 ) was on those stocks whose performance may affect the financial stability of the Hong Kong market. We indicated that the SFC may expand the scope of stocks 5 in the future if the situation warrants. The SFC, being mindful that the reporting obligation was new to the market and would increase the compliance burden of market participants, decided to apply the short position reporting regime to the constituent stocks of the HSI, HSCEI and other financial stocks specified by the SFC. As of 30 October 2015, in total, 127 6 stocks were subject to short position reporting. Market information derived from short position reports 9. The short position reports have given the SFC a much better insight into short selling activities in the Hong Kong market. The following are some key observations: (c) The aggregated market value of short positions has typically been in the range of 1.0% to 1.5% of the total market capitalisation of the stocks that are subject to reporting (see Chart A below). The market value of the aggregated short positions was $197 billion as of 30 October 2015, compared to $191 billion as at the end of 2014 and $204 billion as at the end of 2013; The top 10 stocks with the largest short positions by market value accounted for about 50% of aggregated short positions and 6 of them were HSI constituent stocks as of 30 October 2015 (see Table B below); and The top short position holders were mainly investment banks. Other short position holders included funds, market makers and individuals. 3 See https://www.iosco.org/library/pubdocs/pdf/ioscopd292.pdf 4 Past consultation papers and consultation conclusions papers are published on the SFC website: http://www.sfc.hk/edistributionweb/gateway/en/consultation/ 5 See paragraph 21 of the Consultation Conclusions on Increasing Short Position Transparency (2 March 2010): http://www.sfc.hk/edistributionweb/gateway/en/consultation/conclusion?refno=09cp2 6 As the constituent stocks of HSI and HSCEI and the financial stocks specified by the SFC may change from time to time, this number will as a consequence change accordingly. 5

Chart A: Aggregated market value of short positions as a percentage of market capitalisation of the stocks subject to reporting Table B: Top 10 stocks with the largest short positions by market value Market value of short positions as of 30 October 2015 ($ billion) as % of the stock s market capitalisation PING AN 39.0 12.0% TENCENT 22.5 1.6% CPIC 5.4 6.3% HKEX 5.1 2.1% WANT WANT CHINA 5.0 6.0% ANHUI CONCH 4.8 15.7% LI & FUNG 4.4 8.3% CM BANK 4.3 4.6% CHINA VANKE 4.0 16.6% LENOVO GROUP 3.7 4.6% 10. With a view to increasing market transparency of short selling activities in Hong Kong, in accordance with the SPR Rules, the SFC has been publishing aggregated short positions based on short position reports on a weekly basis since September 2012. Section B Proposed Changes to the Existing Short Position Reporting Regime (I) Expanding the scope of reporting 6

11. As explained in detail in the past consultation papers, increased transparency on short positions would help the SFC in performing its regulatory functions as the information would: (c) (d) allow the SFC to better perform its market monitoring functions including early spotting of possible build-up of large short positions that may be potentially disruptive to the orderly functioning or stability of the market. This will enable the SFC to assess whether any necessary action needs to be taken; provide the SFC with the information which helps to improve insights into market dynamics; help deter abusive short selling behaviour; and provide evidentiary proof that aids post-event investigation and disciplinary actions. 12. As of 30 October 2015, there were 889 Designated Securities on the list of SEHK. A Designated Security is a security that can be short sold under the rules of SEHK 7. The list of Designated Securities is published on the website of the Hong Kong Exchanges and Clearing Limited (HKEx) 8. In general, the list comprises stocks and CISs which include exchange traded funds (ETFs), real estate investment trusts (REITs) and other unit trusts/mutual funds. 13. The 127 stocks that are currently subject to short position reporting is a subset of the Designated Securities. Under the existing short position reporting regime, the SFC does not require short position reporting on the other Designated Securities. The short selling activities of these remaining Designated Securities are significant as shown in Table C below: During January - October 2015, they accounted for 44% of the short selling activities in the Hong Kong market; We estimate that their aggregated short positions could be over $100 billion. Table C: Short selling activities and short positions of Designated Securities As % of all Designated Securities Designated Securities that are covered by SPR Rules Designated Securities that are not covered by SPR Rules Number of stocks 127 (14%) 762 (86%) Market Cap as of 30 October 2015 (HK$ billion) 16,505 (70%) 7,231 (30%) ^ Figures refer to the list of Designated Securities as of 30 October 2015. Average daily short selling during January - October 2015^ (HK$ billion) 5.9 (56%) 4.6 (44%) Average daily turnover during January - October 2015^ (HK$ billion) 46 (58%) 33 (42%) 7 Please see the Eleventh Schedule, Short Selling Regulations, Rules of SEHK: http://www.hkex.com.hk/eng/rulesreg/traderules/sehk/documents/sch-11_eng.pdf 8 See http://www.hkex.com.hk/eng/market/sec_tradinfo/stkcdorder.htm. 7

14. The Designated Securities include many stocks which are not index constituents. And some of them recorded active short-selling turnover. For example, during January - October 2015, the short selling turnover of the top 10 most actively short-sold stocks which are not covered by the existing SPR Rules represented about 13% of the turnover of these stocks. This percentage was higher than that of 9% for the market as a whole. In a few cases, the short selling turnover of some of these stocks reached a level as high as 69%. As short selling may exacerbate selling pressure, there is a general concern that the use of short selling in combination with abusive trading strategies will increase the risk of a disorderly market. 15. In recent years, CISs and ETFs in particular have become an important segment of the Hong Kong market. In 2012, the trading of CISs only accounted for 4% of the total market turnover. However, during January - October 2015, that percentage increased to 9%. During the same period, short selling turnover of CISs accounted for about 24% of daily trading of these CISs and 22% of daily short selling turnover of the entire Hong Kong market. ETFs were the most actively short-sold CISs. During January October 2015, two ETFs were among the Designated Securities with the highest short selling turnover (their average daily short selling turnover exceeded $700 million). 16. On the international front, we note that the short position regimes in the EU and the US require short position reporting on all stocks in general. This is also the case in Australia and Japan. 17. In view of the above trends there is a need to expand the coverage of the SPR Rules to obtain more comprehensive information on short selling activities. The SFC is proposing to extend short position reporting to cover all Designated Securities in order to enhance the transparency and monitoring of short selling activities in light of their potential implications for the orderliness and stability of markets. (II) Reporting threshold trigger for short positions in relation to collective investment schemes (CISs) 18. Pursuant to the SPR Rules, a person who has a net short position in any of the specified shares (as defined in the SPR Rules) that equals to or exceeds 0.02% of the market capitalisation of the listed issuer concerned or HK$30 million, whichever is lower, at the end of the last trading day of a week (Reporting Threshold), has the obligation to report to the SFC. The person has to continue to report until his net short position falls below the Reporting Threshold. When we set the Reporting Threshold in 2012, we took into account the size of the listed companies, market capitalisation, liquidity, the type of market participants and investors and their trading activities. We recognise that the market value of the additional securities proposed to be included in the SPR Rules are generally smaller than that of the index constituent stocks and hence, it may be argued that a different reporting threshold trigger ought to be considered. On this, the SFC is mindful that the reporting regime may become too complex if different reporting thresholds were to apply to different classes of stocks. The SFC is minded to maintain a simple reporting regime and is proposing that under the expanded scope, the existing Reporting Threshold will apply to all Designated Securities except for those that are CISs. 19. For those Designated Securities that are CISs, some are open-ended CISs, it would be impractical and inappropriate to set the reporting threshold by referencing them to market capitalisation given that the value of market capitalisation depends on the total number of 8

outstanding units or shares which number can change frequently and substantially as a result of the daily creation and redemption process. The SFC is thus proposing that for reporting short position in relation to CISs, a person will have to report to the SFC if, as at the end of the last trading day of a week, he holds a net short position in a CIS which has a value that equals to or exceeds $30 million. (III) Designated Securities that are traded in foreign currency 20. Designated Securities can be traded in a foreign currency which currently includes the US dollars or renminbi. It is proposed that in such instances, where the trade price is in a foreign currency, to determine the value of a net short position, the closing price should first be converted into HKD by using the rate of exchange for that foreign currency which is the buying rate for telegraphic transfers on the reporting day, as determined by the Hong Kong Monetary Authority (HKMA). In practice, the exchange rates applicable on a particular reporting day can be obtained from HKEx s website 9, where it publishes the exchange rates to be used for calculating stamp duty on a particular day (as determined by HKMA) under section 18 of the Stamp Duty Ordinance (Cap. 117). This conversion arrangement is the current practice in relation to reportable stocks that are denominated in renminbi. 21. There are also some Designated Securities that are traded in multiple currencies (i.e., the Designated Security is traded under a HKD counter and under another foreign currency counter). In such cases, it is proposed that a person, in determining whether he has an obligation to report, will first have to convert the value of his position in the foreign currency counter into HKD according to the formula as mentioned in paragraph 20 above, and then include that in his position in the HKD counter. If the value of his net short position exceeds the relevant reporting threshold trigger, he will have to report his position to the SFC. (IV) Reporting in contingency situations 22. Under the SPR Rules, the SFC is empowered to require daily reporting on all the specified shares in a contingency situation. In this regard, the SFC will issue a public notice to give market participants at least 24 hours notice in advance before the daily reporting takes effect. When the SFC believes that daily reporting is no longer necessary, it will issue a public cessation notice to notify market participants. 23. When short position reporting is extended to cover all Designated Securities, the SFC recognises that it could be operationally burdensome for both the SFC and market participants if daily reporting of short positions in all Designated Securities is required. Moreover, depending on the market situation, the SFC may not need the daily reporting of short positions for all Designated Securities. 9 See http://www.hkex.com.hk/eng/market/sec_tradinfo/stampfx/stampfx.asp 9

24. Therefore, the SFC is proposing that, in contingency situations, the SFC will determine the Designated Securities that will be subject to daily reporting (Daily Reporting Securities). A public notice identifying the Daily Reporting Securities will be provided by the SFC before daily reporting takes effect. Depending on the prevailing market situation, the SFC may decide to stop daily reporting on one or more of the Daily Reporting Securities. Questions (please provide reasons in support of your comments): Q1 Q2 Q3 Do you have any comments on expanding the scope of short position reporting to all Designated Securities? Is it appropriate not to apply the existing threshold trigger of 0.02% for reporting short positions in CISs? Do you have any comments on the proposal that daily reporting on short positions would only apply to those Daily Reporting Securities as determined by the SFC in contingency situations? (V) Reporting through SFC designated electronic system 25. Currently, market participants must report short positions using an electronic system developed specifically for this purpose by the SFC namely, the Short Position Reporting Service 10. They must also use a form specified by the SFC under section 402 of the Securities and Futures Ordinance (SFO), i.e., the Reportable Short Position Form (Form) 11. The Form has to be completed in accordance with the directions and instructions set out in the Notes to the Reportable Short Position Form released by the SFC (Notes) 12. 26. In view of the rapid pace at which technology evolves, we envision that there may be more than one electronic system to be adopted to report short positions in the future. Thus, the SFC would like to take this opportunity to provide for that flexibility in the SPR Rules. We wish to clarify that it is SFC s longer term plan to provide for another alternative electronic system for reporting. For now, market participants are expected to continue using the existing arrangements for reporting short positions. 27. With regards to the use of the Short Position Reporting Service, as there has been a number of instances in the past where reports submitted had failed to comply with the Notes, the SFC would like to remind market participants that they must complete the Form in accordance with the directions and instructions set out in the Notes. Otherwise, they may not be regarded as having complied with the SPR Rules despite the reports having been submitted. To drive home this point, the SFC is proposing to amend the SPR Rules to make it clear that market participants must follow the directions and instructions provided by the SFC regarding the use of the designated electronic system and the submission of short position reports. Question (please provide reasons in support of your comments): 10 The Short Position Reporting Service is available on the SFC Online Services: http://www.sfc.hk/web/html/en/sfc_online_portal/online_service.html 11 Link to the Reportable Short Position Form https://portal.sfc.hk/dsp/gateway/welcome 12 Link to the Notes to the Reportable Short Position Form: http://www.sfc.hk/web/doc/en/research/short-positionreporting/notes%20to%20spr%20form_en.pdf 10

Q4 Do you have any comments on the proposal to provide in the SPR Rules the flexibility for the SFC to designate the use of more than one electronic system to report short positions? Section C Proposed amendments to the Securities and Futures (Short Position Reporting) Rules (Cap 571AJ) 28. Appendix A to this Consultation Paper contains the SPR Rules with the proposed amendments (which are lined for easy reference) to reflect the above proposals: (c) (d) (e) (f) To extend short position reporting to all Designated Securities which currently comprise stocks and CISs, the definition of specified shares in Rule 2 and the list of specified shares in Schedule 1 are revised. The existing threshold trigger for reporting short positions in stocks remains unchanged and the threshold trigger for reporting short positions in CISs will be set at $30 million. Amendments are made to Rule 3(1) and 3(2). New Rules 3(2)(ba) and 3(1) are introduced. Rule 3(2)(c) is amended to cover a situation where the closing price of a Designated Security is in a foreign currency, it must be converted into HKD at the rate of exchange for that foreign currency as specified in Rule 3(2)(d). In a contingency situation, daily reporting on short positions will apply to a specified list of Designated Securities. A new Rule 7(2)(aa) is introduced to serve this purpose and consequential amendments are also made to Rule 4(3). Depending on the then prevailing market situation, the SFC may decide to stop daily reporting on one or more of Daily Reporting Securities. Amendments are made to Rule 7(3) to provide for such flexibility. To enable the SFC to designate more than one electronic system to report short positions, Rule 4(9) is replaced by a new Rule 4A. In addition, consequential amendments are made to Rules 4(2), 4(4) 4(8), 5(1) and 5(2). The new Rule 4A also clarifies that a short position report will only be regarded as submitted if it is submitted in accordance with the directions and instructions published by the SFC for the use of the electronic system. In addition, the definition of business day will be removed from the SPR Rules in view of amendments made in 2012 to section 1 of Part 1 of Schedule 1 to the SFO (definition of business day). 29. The SFC invites the public to comment on proposed changes to the SPR Rules. 11

Concluding Remarks 30. The SFC recognises that while the imposition of short position reporting to all Designated Securities will increase market participants compliance costs, the SFC s ability to monitor and maintain an orderly and properly functioning securities and futures market would be enhanced, thus bringing overall long-term benefits to the industry. In addition, the short position information that the SFC has been publishing pursuant to the SPR Rules has also improved the transparency of the market and can enable investors to make better informed investment decisions. 12

Appendix A Securities and Futures (Short Position Reporting) Rules (Cap 571, section 397(1) and (2)) Part 1 Preliminary 1. (Omitted as spent) 2. Interpretation In these Rules business day ( 營業日 ) means a day other than a public holiday; a Saturday; and (c) a gale warning day or a black rainstorm warning day as defined in section 71(2) of the Interpretation and General Clauses Ordinance (Cap 1); daily reporting requirement notice ( 每日申報規定公告 ) means a notice published under rule 7(1); reportable short position ( 須申報淡倉 ) has the meaning given by rule 3; reporting day ( 申報日 ) means unless paragraph applies, the day specified in rule 4(1); or if a daily reporting requirement notice is in force, the day specified in rule 4(3); reporting deadline ( 申報期限 ) means unless paragraph applies, the period specified in rule 4(2); or if a daily reporting requirement notice is in force, the period specified in rule 4(4); specified ATS ( 指明自動化交易服務 ) means an authorized automated trading services specified in Schedule 2; 13

specified shares ( 指明股份 ) means shares in a corporation, or interests in a collective investment scheme (whether or not the interests are shares in a corporation), which are listed or admitted to trading on the Stock Exchange and specified in Schedule 1; Stock Exchange ( 證券交易所 ) means the recognized stock market operated by the Stock Exchange Company. 3. Reportable short position (1) In these Rules, a person has a reportable short position in any specified shares, except specified shares which are interests in a collective investment scheme, if the person has a net short position value in the specified shares that is equal to or more than the threshold specified in subrule (2); or in any specified shares which are interests in a collective investment scheme, if the person has a net short position value in the specified shares that is equal to or more than the threshold specified in subrule (2)(ba). (2) For the purposes of this rule the net short position value that a person has in any specified shares is calculated in accordance with the following formula Where A B C (A B) C is the number of the specified shares in the person s short position; is the number of the specified shares in the person s long position; is the specified closing price of the specified shares; in subrule (1), the threshold in relation to a reporting day is the lower of (i) (ii) $30 million; and 0.02% of the value of the total number of the specified shares issued by the corporation concerned, calculated in accordance with the following formula Where C D C D is the specified closing price of the specified shares; is the total number of the specified shares issued by the corporation, as at the close of trading on the Stock Exchange on the reporting day; (ba) (c) in subrule (1), the threshold in relation to a reporting day is $30 million; in paragraphs and, specified closing price, in relation to any specified shares, is, subject to paragraph (d) 14

(d) (i) (ii) the closing price of the specified shares on the reporting day; or if on the reporting day the specified shares are suspended from trading on the Stock Exchange, the last closing price of the specified shares before the suspension, as determined in accordance with the rules of the Stock Exchange Company. if, in relation to any specified shares, the closing price referred to in subparagraph (c)(i) or (ii) is expressed in a currency other than Hong Kong dollars, the closing price is taken to be its equivalent in Hong Kong dollars on the reporting day, calculated using the rate of exchange for the currency that is the buying rate for telegraphic transfers at commencement of business on the reporting day, as determined by the Monetary Authority. (3) In this rule long position ( 好倉 ), in relation to any specified shares, means the number of the specified shares that a person beneficially owns; short position ( 淡倉 ), in relation to any specified shares, means the position in the specified shares that a person has as a result of selling the specified shares at or through the Stock Exchange or by means of any one or more specified ATS, or any combination of these methods of selling, where at the time of each sale comprised in the position, the person did not have a presently exercisable and unconditional right to vest the specified shares in the purchaser; or each sale comprised in the position was the subject of a short selling order. Part 2 Reportable Short Positions 4. Reportable short positions to be notified to Commission (1) Unless a daily reporting requirement notice is in force, subrule (2) applies to a person who has a reportable short position in any specified shares at the close of trading on the Stock Exchange on the Friday of any week; or if the Stock Exchange does not open for trading on the Friday of any week, the last weekday before Friday on which the Stock Exchange is open for trading. (2) A person to whom this subrule applies must notify the Commission of the reportable short position within 2 business days after the day specified in subrule (1) in accordance with this rule and rule 4A. (3) If a daily reporting requirement notice is in force, subrule (4) applies to a person who has a reportable short position in any specified shares to which the notice relates at the close 15

of trading on the Stock Exchange on each day on which the Stock Exchange is open for trading. (4) A person to whom this subrule applies must notify the Commission of the reportable short position within 1 business day after the day specified in subrule (3) in accordance with this rule and rule 4A. (5) If a reportable short position in any specified shares is held on trust, the duty to notify under subrule (2) or (4) does not apply to a beneficiary of the trust and instead applies to the person who is the trustee of the trust as if that person were the beneficiary. (6) In determining whether a corporation has a reportable short position in any specified shares the short position and the long position (if any) in the specified shares attributable to a particular collective investment scheme; and those attributable to another collective investment scheme, are to be treated separately and not to be aggregated. (7) In determining whether a person has a reportable short position in any specified shares the short position and the long position (if any) in the specified shares attributable to any partnership; and those attributable to another partnership, are to be treated separately and not to be aggregated. (8) If the partners in a partnership have a reportable short position in any specified shares attributable to the partnership, those partners are regarded as having complied with the duty to notify under subrule (2) or (4) in respect of those specified shares if one of those partners or another person authorized by all those partners has submitted, on behalf of those partners, a notice that complies with rule 4A. 4A. Giving notification to the Commission (9) Notification to the Commission required under subrule 4(2) or (4) must be in the form specified by the Commission under section 402 of the Ordinance for the purposes of this rule; must contain (i) (ii) particulars identifying the person who has a reportable short position in specified shares; particulars of the net short position value and number of specified shares comprised in the reportable short position; and 16

(c) (iii) the name and stock code of the specified shares comprised in the reportable short position; and be submitted to the Commission electronically by means of an online communication system designated by the Commission under rule 5(1) for the purposes of these Rules is to be regarded as duly submitted only if it is submitted (i) (ii) by means of an electronic system designated by the Commission under rule 5(1); and in accordance with the directions and instructions relating to the system referred to in rule 5(2). 5. Commission may designate online communication system (1) The Commission may, for the purposes of these Rules, designate an online communication system one or more electronic systems. (2) Where the Commission designates an online communication electronic system under subrule (1), it must as soon as reasonably practicable publish directions and instructions relating to the use, and the submission of notifications under rule 4(2) or (4) by means, of that system in the manner that it considers appropriate. 6. Commission to publish particulars of reported short positions (1) Subject to subrules (2) and (3), the Commission must, as soon as reasonably practicable after the reporting deadline for a reporting day, publish in the manner that it considers appropriate the particulars of the reportable short positions notified to it in respect of the reporting day under rule 4(2) or (4) that it considers appropriate. (2) Subrule (1) does not require the Commission to publish particulars earlier than 5 business days after the reporting day; or if a daily reporting requirement notice is in force, more frequently than once a week. (3) Any particulars published under subrule (1) must be, so far as reasonably practicable, presented in a way which prevents the identity of a person who has submitted a notice under rule 4(2) or (4) and that person s reportable short position from being ascertained from it. Part 3 Daily Reporting Requirements 7. Daily reporting requirement notice 17

(1) The Commission may publish a daily reporting requirement notice in accordance with this rule if the Commission believes that circumstances exist, in Hong Kong or elsewhere, which threaten or may threaten the financial stability of Hong Kong; and as a result of those circumstances, the Commission needs to be notified of reportable short positions on a daily basis. (2) A daily reporting requirement notice (aa) (c) must declare that, from the date specified in the notice, a person who has a reportable short position on each day on which the Stock Exchange is open for trading must notify the Commission of the reportable short position within 1 business day; must identify the specified shares to which the notice relates; must be published in the Gazette at least 24 hours before the date specified in the notice; and may be published or announced on the Commission s website and in any other manner and at the times that the Commission considers appropriate. (3) If a daily reporting requirement notice is in force and the Commission believes that it no longer needs to be notified of reportable short positions in one or more than one of the specified shares to which the notice relates on a daily basis, the Commission must publish on its website a notice (cessation notice) declaring that the daily reporting requirement notice is to cease to have effect in relation to the specified shares identified in the cessation notice from the date specified in the cessation notice. (4) Neither a daily reporting requirement notice nor a cessation notice is subsidiary legislation. 18

Schedule 1 Specified Shares 1. Shares which are a constituent of the Hang Seng Index. 2. Shares which are a constituent of the Hang Seng China Enterprises Index. 3. Shares or interests in a collective investment scheme which [rule 2] are shares determined by the Stock Exchange Company to be a designated security in accordance with the rules of the Stock Exchange Company; and are shares classified by the Hang Seng Indexes Company Limited as financial stocks in accordance with the Hang Seng Industry Classification System. Schedule 2 Specified ATS [This schedule is deliberately left blank] [rule 2] 19